(Written by Rebecca Lipman. List compiled by Eben Esterhuizen, CFA. Accounting data sourced from Google Finance. Free cash flow data from Yahoo! Finance.)
Warren Buffett has made no secret of his aversion to technology investments, but on Monday he shocked investors with an $11 billion investment in International Business Machines Corp (IBM). The 64 million share investment spanned over the last eight months landed Berkshire Hathaway with a 5.5% stake in the tech giant. He is now the single largest shareholder in the company.
Buffett always said he would not invest in technology because he more-or-less did not understand it, nor how consumers would interact with it in the future – something he was more confident with in relation to banks or consumer goods like Pepsi and chewing gum.
So why the change of heart?
“In an interview on cable television network CNBC, Buffett said he was struck by IBM’s ability to retain corporate clients, which made it indispensable in a way that few other services are,” reports Reuters. He added, “I don’t know of any large company that really has been as specific on what they intend to do and how they intend to do it as IBM.”
Warren Buffett admits that he should have paid the company more attention years ago, when its share price was much lower than it is today.
The trades, which began in March, were confidential until Monday. He asked to keep the positions under wraps because “given his notoriety, if his trades were to be known, masses of investors might try to pile in as well.”
If even value investing gurus like Buffett are changing their tune on investment companies, does it signal more investors will follow suit?
Investing Ideas: Other tech opportunities?
With his investment into IBM, Buffett is signaling that there are value opportunities with big tech companies.
With that in mind, we did a screen on large-cap tech stocks, that are undervalued relative to free cash flow per share.
In addition, all of these names have seen improving inventory turnover, meaning that revenues have expanded faster than inventory positions during the current quarter (i.e. an encouraging trend).
These tech companies appear to be undervalued, and have reported improving efficiency ratios. Should any of these names be on your radar?
analyse These Ideas (Tools Will Open In A New Window)
1. ASML Holding NV (ASML): Engages in designing, manufacturing, marketing, and servicing semiconductor processing equipment used in the fabrication of integrated circuits. Market cap at $17.92B. Price / Free Cash Flow at 7.35. Revenue grew by 24.02% during the most recent quarter ($1,458.5M vs. $1,176M y/y). Inventory grew by 0.41% during the same time period ($1,455.8M vs. $1,449.8M y/y). Inventory, as a percentage of current assets, decreased from 33.34% to 25.99% during the most recent quarter (comparing 3 months ending 2011-09-25 to 3 months ending 2010-09-26).
2. Siemens AG (SI): Operates in the industry, energy, and healthcare sectors worldwide. Market cap at $93.0B. Price / Free Cash Flow at 12.18. Revenue grew by 2.4% during the most recent quarter ($17,844M vs. $17,425M y/y). Inventory grew by -2.64% during the same time period ($15,874M vs. $16,304M y/y). Inventory, as a percentage of current assets, decreased from 33.31% to 29.48% during the most recent quarter (comparing 3 months ending 2011-06-30 to 3 months ending 2010-06-30).
3. Broadcom Corp. (BRCM): Designs and develops semiconductors for wired and wireless communications. Market cap at $19.04B. Price / Free Cash Flow at 13.12. Revenue grew by 8.36% during the most recent quarter ($1,957M vs. $1,806M y/y). Inventory grew by -8.2% during the same time period ($491M vs. $534.86M y/y). Inventory, as a percentage of current assets, decreased from 13.95% to 10.93% during the most recent quarter (comparing 3 months ending 2011-09-30 to 3 months ending 2010-09-30).
Interactive Chart: Press Play to see how analyst ratings have changed for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.